Other things held constant,:

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that investors prefer more liquid investments and therefore require a higher rate of return for longer maturity bonds. This results in an upward sloping yield curve.

Answer: B
 The market segmentation theory suggests that investors have specific maturity preferences and only invest in certain segments of the yield curve. This results in an upward sloping yield curve.

Answer: C
 The expectations theory suggests that long-term interest rates are equal to the expected average of short-term interest rates over the same period. This implies that an upward sloping yield curve would be expected in a normal economic environment where interest rates are expected to increase in the future.

Answer: D
 This statement is not true. In a "normal" economic environment, the yield curve should slope upwards due to the expectation of future interest rate changes and investors' preference for liquidity.

Answer: E
 This statement is true. A downward sloping yield curve suggests that investors expect interest rates to decrease in the future, which would lead to lower yields on long-term bonds.

Other Things Held Constant